New IMF Report Warns On China Investment

CHINA’S over-dependence on investment as a driver of growth has been highlighted in a new International Monetary Fund (IMF) report.

Investment accelerated between 2007 and 2011 to counter the effects of the global financial crisis, according to this Reuters report on the IMF study.

“Depending on precise assumptions, over this period, China may have been over-investing by between 12 and 20 percent of gross domestic product relative to its steady-state desirable value,” writes the IMF.

“Even allowing for elevated investment levels associated with most economic take-offs, the econometric evidence suggests that China is over-investing,” it said.

“China’s predicted investment norm over the last 30 years has ranged between 33-43% of GDP. In reality, it has fluctuated in a much broader band of 35-49% of GDP.”

The IMF worries that Beijing could be tempted to stick to the investment growth model, resulting in investment’s share of GDP rising to as much as 70%.

“Under such a strategy, vulnerabilities will likely grow in the form of hidden deadweight that will have to be paid in future in one form or another. The cost of financing such an elevated level of investment could undermine overall economic stability,” it added.

Will China’s new political leaders be able to avoid this risk by scrapping the old growth model?

“For a country widely seen as the world’s other superpower, we know shockingly little about the worldviews, values, and socioeconomic policies of the seven men just named the new leaders of China. Unlike American politicians, Chinese leaders carry out their campaigns largely behind closed doors, and they are not chosen by the people,” writes the academic Cheng Li.